Long Term View

Fears of COVID-19 have caused the indices to fall 12% in the past three weeks. Last week, stocks suffered their biggest weekly losses since the financial crisis of 2008. Short-term fears over newly reported Coronavirus cases cause markets to tumble one day, while short-term hopes over government stimulus and global coordination cause markets to skyrocket the next.

This volatility is most evident in travel stocks, some of which have lost nearly 50% of their value:

Financial stocks have also been particularly hard hit, due to fears over recession and the trimming of interest rates:

I'm often asked if I really think I can beat the S&P 500 index long term, given the unlikely odds for success. I frequently wonder the same thing myself (and still don't know the answer), but weeks like these give me a little more confidence. Consider this quote from a recent article (emphasis added):

“We still consider all four major U.S. airlines” — American Airlines Group Inc. US:AAL, Delta Air Lines Inc. US:DAL, Southwest Airlines Co. US:LUV, and United Airlines Holdings Inc. US:UAL — as "attractively valued" when considering current share prices relative to their regular earnings power, said Colin Scarola, an analyst with CFRA.

The trouble is, our investment recommendations pertain to our view of stock performance over the next year. And the next year is looking like anything but normal due to the virus outbreak.”

Plus, things could change pretty quickly with the industry, Scarola said.

“The uncertainty of the COVID-19 impact on air travel demand, and the history of large losses when demand abruptly declines, pose too great a risk over the next year ... Even if the long-term earning power of some of these airlines is little changed,” Scarola said.

Here you have a professional investor saying that airlines are "attractively valued" relative to "regular earnings power" and "long-term earnings power" - yet he can't recommend them because they only consider "stock performance" over the "next year", "things change pretty quickly" and there is "uncertainty"!

Not to pick on this particular analyst - but this sort of "professional" approach seems directly counter to both positive investment returns and common business-sense. If you aren't buying a business for the long term, then you are speculating, not investing. If you can't recommend a business that is "attractively valued" and has good "long term" prospects, then when can you recommend a business? Things could always "change pretty quickly" and there is always "uncertainty", which I doubt anyone has the ability to realistically quantify (how many analysts predicted a global pandemic at the start of the year?)

What does this mean, in practical terms? While there may be some near-term struggles for weaker companies, and while this statement is in no way intended to minimize the very real disruption, pain and suffering from the virus that many individuals will experience, I don't think that anything fundamental has changed about the long-term growth trajectory in worldwide travel. The travel industry has survived SARS, MERS, Ebola and 9/11 - it will likely survive this.

I've been adding to my positions in LUV and BKNG - both well managed, well capitalized leaders in their industries. Long term, their prospects are likely unchanged, and I thought they were cheap even before this recent crisis. I've also been buying / adding to financial companies like WFC, BRK.B (see analysis here), and BAC as their share prices have fallen to attractive levels. I exited CS after their CEO was made a scapegoat, and opened new positions in GM, VIAC and HUN.

I wish I could say that everything looked attractive right now - but for the most part, most stocks on my watchlist still seem significantly overpriced - based, again, on long-term earnings potential. It's funny that the market can be overly-optimistic about historically loss-making companies, placing all bets on hopes of a business model that is unproven long-term; while at the same time be overly-pessimistic about historically cash-generating companies, placing all bets on fears of a pandemic that is provably short-term ("provable" might be too strong of a word here - but it seems more likely than not that, worst case, a vaccine or treatment will be implemented in 1-2 years).

Is this the bottom? I have no idea - but I will always feel comfortable buying attractively priced companies with strong business models, "long-term earnings power", and reasonable odds of survival even in turbulent times. And I will continue evaluating individual companies on their individual long-term prospects and prices, regardless of what the market does tomorrow.

Disclosure: I am long LUV, BKNG, WFC, BRK.B, BAC, GM, VIAC, HUN